Yahoo to spend big to buy Tumblr

ahoo is buying online blogging forum Tumblr for $1.1 billion as CEO Marissa Mayer tries to rejuvenate an Internet icon that had fallen behind the times.

The deal announced Monday is Mayer’s boldest move since she left Google 10 months ago to lead Yahoo’s latest comeback attempt. It marks Yahoo’s most expensive acquisition since the Sunnyvale, Calif., company bought online search engine Overture a decade ago for $1.3 billion in cash and stock.

Yahoo is paying mostly cash for Tumblr, dipping into what remains of a $7.6 billion windfall reaped last year from selling about half of its stake in Chinese Internet company Alibaba Holdings Group. Taking over Tumblr will devour about one-fifth of the $5.4 billion in cash that Yahoo had in its accounts at the end of March.

While hailing Tumblr as a fount of creativity that attracts 300 million visitors each month, Mayer told analysts Monday that she is ‘‘making a sincere promise to not screw it up.’’ David Karp, a high school dropout who started Tumblr six years ago, will remain in control of the service in an effort to retain the same ‘‘irreverence, wit and commitment to empower creators,’’ Yahoo said.

Karp, 26, may now have a managerial mentor in Mayer, 37. Tumblr, which will remain based in New York, has about 175 employees while Yahoo has 11,300 workers.

Mayer, who worked closely with Google co-founders Larry Page and Sergey Brin during her time at the company, had high praise for Karp during Monday’s conference call. ‘‘David Karp is one of the most inspiring, insightful entrepreneurs that I have ever met,’’ she said.

In his statement, Karp predicted Yahoo would help Tumblr grow even faster as he strives ‘‘to make the Internet the ultimate creative canvas. ‘‘

The deal is expected to close during the second half of this year.

Tumblr will now play a pivotal role in Mayer’s attempt to reshape Yahoo. To take on the challenge, Mayer ended a highly successful 13-year career at Google, which she helped surpass Yahoo as the Internet’s most influential company. Since coming to Yahoo, Mayer has concentrated on improving employee morale, redesigning services and bringing in more engineering talent through a series of small acquisitions that have collectively cost less than $50 million.

Yahoo will still focus on mostly small deals, Mayer said. She seized the opportunity to buy Tumblr because she believes the service can accelerate her efforts to turn around Yahoo.

‘‘Tumblr is a game changer,’’ Mayer assured analysts.

As popular as Tumblr has become, the service remains unprofitable. That is likely to raise questions about whether Yahoo paid too much in Mayer’s zeal to gain control over a hot service. Facebook Inc. faced similar doubts last year when it bought Instagram, a rapidly growing photo sharing site, that also hadn’t been trying to make money. Facebook initially agreed to pay $1 billion in stock for Instagram, but the value had fallen to $715 million by the time that deal closed. Facebook still hasn’t proven it will be able to make money off of Instagram

Mayer’s efforts at Yahoo have been well-received on Wall Street so far, although most of the 69 percent surge in Yahoo’s stock price under Mayer’s leadership has been driven by the rising value of Yahoo’s remaining 24 percent in Alibaba. When Alibaba goes public within the next few years, analysts have estimated Yahoo could collect another $10 billion to $20 billion by selling the rest of its Alibaba stock.

If this deal pays off the way Mayer envisions, Tumblr could help Yahoo finally get its stock price to $33. That would be a major coup because many investors soured on Yahoo after a previous regime led by co-founder Jerry Yang squandered an opportunity five years ago to sell the entire company to Microsoft for $33 per share. The stock spent more than four years trading below $20 before the recent surge. The shares gained 22 cents to $26.74 in Monday’s morning trading.

The deal could backfire though if Yahoo’s effort to make more money alienate a Tumblr user base that so far has been subjected to hardly any advertising during the service’s six-year history.

‘‘Yahoo has to manage this acquisition in a way that keeps Tumblr’s user base while trying to add advertising, which historically tends to turn off a lot of people,’’ said Forrester Research analyst Zachary Reiss-Davis.

Mayer said Yahoo will work with Tumblr to create ads that ‘‘are tasteful and seamless.’’ The company expects Tumblr to start increasing Yahoo’s revenue next year.

Mayer is betting that Tumblr will provide Yahoo with a captivating hook to reel in more traffic and advertisers on smartphones and tablet computers. That rapidly growing market is expected to become even more important during the next decade as people increasingly consume digital content on mobile devices instead of laptop and desktop machines.

More than half of Tumblr’s users connect to the service through the mobile app, and engage in an average of seven sessions per day.

‘‘I would characterize Tumblr as being ahead of Yahoo in terms of its work on mobile,’’ Mayer said.

Besides offering one of the top mobile apps, Tumblr also runs one of the world’s busiest websites, featuring 75 million daily posts about everything from politics to pets. Advertising has been a missing ingredient so far as Tumblr, like many online services in their early stages, focused on building a loyal audience before turning its attention to making money.

The deal also has some symbolic significance for Yahoo, an 18-year-old company that had spent much of the past decade aimlessly drifting under different management teams while Google Inc. overtook it in terms of size and influence. At the same time, newcomers such as Facebook Inc. and Twitter began to command the attention of people who found themselves spending less and less time on Yahoo.

Part of Yahoo’s problems stemmed from missed chances to improve its service and technology.

Yahoo flirted with potential acquisitions of Google and Facebook in those two companies’ early days, only to have the talks unravel because Yahoo wasn’t prepared to pay asking prices that were far below the current market values of Google ($300 billion) and Facebook ($63 billion). Yahoo also considered buying YouTube in 2006, only to be outbid by Google, which snapped up the world’s leading online service for $1.76 billion — a price that now looks like a bargain.

Even when Yahoo did pull off deals, the company has been criticized for mismanaging a list of acquired services that includes photo-sharing Flickr, online help-wanted service HotJobs and content-sharing service Del.icio.us. Yahoo ended up selling HotJobs and Del.icio.us, but Mayer has been looking at ways to spruce up Flickr and blend its photos into more of Yahoo’s other services. Mayer is expected to discuss more changes for Flickr at an event in New York Monday evening.

Tumblr could help Yahoo recapture some of its cachet with teens and adults in their early 20s, a demographic that has become tougher for Yahoo to reach in recent years as it fell behind the technological curve and struggled to develop compelling services.

While Facebook has turned into a mainstream social network where even grandparents now connect family and friends, Tumblr has become one of the places where the cool kids hang out.

‘‘Tumblr is redefining creative expression online,’’ Mayer said. ‘‘On many levels, Tumblr and Yahoo couldn’t be more different, but, at the same time, they couldn’t be more complementary.’’

Tumblr emerged as a trendy online hangout by providing a service that makes it easy to share blog posts, photos, video and other content in an enthralling mosaic. The service says it has amassed more than 50 billion posts from 108 million blogs. Tumblr users rely on a dashboard to pinpoint the kinds of blogs that they want to track and also have tools to pass along the posts that interest them.

That wealth of content could be interwoven into Yahoo’s other services that provide coverage of general news, sports, finance and entertainment. Tumblr also will fill Yahoo’s gaping void in the realm of social media. Yahoo so far has had to connect its services to Facebook and Twitter to give its users a social networking outlet.

Having its own social networking service will also give Yahoo more insights into the things that people like — a key to distributing ads to consumers most likely to be interested in a specific products. That data, in turn, should help Yahoo sell more ads and accelerate its revenue growth. After three successive years of declines, Yahoo’s revenue rose slightly last year, but lagged far behind the growth at Google and Facebook. Mayer has vowed to bring Yahoo’s revenue growth back to at least the level of the overall Internet ad market.

Yahoo’s acquisition will deliver a jackpot to Karp, who dropped out of high school to concentrate on computer programming. He ended up being home schooled while taking classes in Japanese and working on gambling software. Later, he became a product executive at a parenting website called UrbanBaby. After CNet bought the site in 2006, Karp set up his own a development service called ‘‘Davidville’’ before deciding to create an outlet for personal expression — an endeavor that hatched Tumblr.

Karp’s cut from the Yahoo deal is about $275 million. Most of the rest of the money will be paid to the venture capitalists that invested about $125 million into Tumblr. That list includes Spark Capital, Sequoia Capital, Greylock Partners, Union Square Ventures and Insight Venture Partners.

Mayer, CEO of the biggest U.S. Web portal since July, is betting that Tumblr will help transform Yahoo into a hip destination in the era of social networking as she challenges Google Inc. and Facebook Inc. in the $17.7 billion display ad market. The price she's paying — about a fifth of Yahoo's $5.4 billion in cash — underscores the deal's importance to Mayer's turnaround effort, according to Zachary Reiss-Davis, an analyst at Forrester Research Inc.

"It's an aggressive move," Reiss-Davis said in an interview. "They are saying, 'where is our next group of people who are going to spend many hours per week on Yahoo properties?' It's big bet that the answer is going to be Tumblr users."

Yahoo's shares declined as much as 2 percent to $26 in early trading. The stock had advanced 33 percent this year through May 17, compared with a 17 percent gain for the Standard & Poor's 500 Index.

Adding Visitors

Adding Tumblr is expected to expand Yahoo's audience by 50 percent to more than 1 billion monthly visitors, and increase traffic by about 20 percent, according to the statement. The transaction is expected to close in the second half of 2013.

"Our roadmap isn't changing," Karp said in the statement. "Our mission — to empower creators to make their best work and get it in front of the audience they deserve — certainly isn't changing."

Founded by Karp in 2007, Tumblr grew to log more than 13 billion global page views in the past month. The site offers a free service for publishing blogs on the Web and mobile devices, and tools for sharing photos and other content across social networks.

While Tumblr recently began letting advertisers pay for prominent placement and has said it expects to become profitable this year, Karp has resisted covering webpages with promotions to avoid alienating Tumblr's younger audience.

Blog Network

The deal will make a multimillionaire out of Karp, who founded the company using money and experience he had acquired as a software consultant for the website UrbanBaby. Prior to that role, Karp interned at online-video creator Frederator Studios and worked as a salesperson at a Tekserve store in New York, according to his profile on LinkedIn Corp.'s site.

Karp grew up on Manhattan's Upper West Side and dropped out of high school before moving by himself to Tokyo when he was 17. He founded Tumblr after returning to New York and still hasn't earned his high-school diploma. The company's headquarters, located in New York's startup-friendly Flatiron District, is adorned with eclectic artwork.

Yahoo, which makes almost all of its revenue from online promotions, will inherit the challenge of making money from a site while trying to preserve its cool factor, Reiss-Davis said.

"They have to balance keeping those users actively using Tumblr, while at the same time adding advertising and putting monetization around it," he said. "Those are very difficult tasks to balance against each other."

Tumblr's Backers

Tumblr's content may also pose the risk of turning off some of Yahoo's advertisers. The site's terms of service permit nudity and other controversial material, and at least one pornographic site ranks among the 20 most-popular Tumblr blogs, according to Quantcast Corp.

Among Tumblr's backers, Union Square Ventures in New York and Boston-based Spark Capital are the biggest winners. The firms led Tumblr's first two financings, a $775,000 round in 2007 and a $4.5 million round the next year.

Sequoia Capital joined as an investor in late 2010 as part of a $30 million funding round. Tumblr then raised $85 million the following year, with firms including Greylock Partners, Insight Venture Partners, and Draper Fisher Jurvetson's Growth Fund joining the existing investors.

Yahoo's acquisition of Tumblr also brings validation to the New York technology community, which has seen startup activity increase in recent years with the success of companies including Tumblr, Gilt Groupe Inc. and Etsy Inc., according Ben Lerer, CEO of Thrillist Media Group and managing director at Lerer Ventures.

New York

"This is a big, big win for New York," Lerer said. "Everybody believes that there's going to be a bunch of billion-dollar companies coming out of New York in the next few years, and this is the beginning."

Yahoo's purchase may help seed the next generation of New York startups, according to Howard Lerman, CEO of Yext, a business-listings website based in New York.

"It's going to, first of all, give a billion dollars into the VCs and the people that work at Tumblr, and secondly it's going to give the people at Tumblr the confidence to go out and try this themselves," Lerman said.

Seeking Buyer

Tumblr had contacted bigger technology companies seeking to be bought, or form a partnership, prior to closing the deal with Yahoo, according to people with knowledge of the matter, who asked not to be identified because the overtures were private.

Mayer has purchased at least 11 companies in her 10 months as CEO, from mobile app makers Stamped Inc. and Jybe Inc. to Summly, the news-reading application created by teenager Nick D'Aloisio. Before Tumblr, most of her acquisitions have been small and focused on talent acquisitions -- small teams bought at low prices -- an approach she advocated during her first conference call with analysts last year.

Tumblr ranks among Yahoo's largest acquisitions, which include the $5.7 billion purchase of Mark Cuban's Broadcast.com and a $3.6 billion deal for Web-hosting site Geocities in 1999.

Dealmaking at Yahoo is being led by Jacqueline Reses, a private-equity veteran who was promoted last month to the role of chief development officer to reflect her oversight of talent through acquisitions, partnerships and company culture. Reses told employees at a staff meeting in late February that Yahoo is working on two "significant" acquisitions, according to a report in technology blog AllThingsD.

Yahoo Deals

Yahoo's plan to buy a stake in France Telecom SA's video site Dailymotion stalled last month after a disagreement about the deal, according to the French government.

Mayer had little to show for her efforts to turn around the company as of last month, when Yahoo reported a drop in its main display-advertising business and issued a sales forecast for this quarter that may fall short of analysts' estimates. Mayer's push to revamp products such as Yahoo's home page and e-mail have made little headway to reverse a decline in display, an area where Google and Facebook are gaining ground.